Oil Price Shock and Macroeconomic Performance in Nigeria

Abstract

Nigeria is a mono-product economy, where the main export commodity is crude oil, changes in oil prices has implications for the Nigerian economy and, in particular, exchange rate movements. The latter is mostly important due to the double dilemma of being an oil exporting and oilimporting country, a situation that emerged in the last decade. The study examined the effects of oil price shock on macroeconomic performance in Nigeria using yearly data from the year 1979 to 2014. The theoretical framework of this study is based on unrestricted Vector Auto Regression model by Sims (1980). The models are used to estimate the relationship between oil price changes,inflation rate, Gross Domestic Product and real exchange rate. Unit root tests, Johansen co-integration technique, variance decomposition test, granger casualty test andVector Auto Regression Mechanism was used to examine the speed of adjustment of the variables from the short run dynamics to the long run. It was observed that a proportionate change in oil price leads to a more than proportionate change in real exchange rate, interest rate and Gross Domestic Product in Nigeria. Nigeria government should diversify from the Oil sector to other sectors of the economy so that Crude oil will no longer be the mainstay of the economy and frequent changes in crude oil price will not influence exchange rate volatility significantly in Nigeria.

Keywords: Oil price, Macroeconomic variable, VAR etc